Important Questions Class 12 Macro Economics Chapter 6

Important Questions Class 12 Macroeconomics Chapter 6

Important Questions for CBSE Class 12 Macroeconomics Chapter 6 – Open Economy Macroeconomics

Important Questions are ideal to review the major themes that are most likely to be covered in exams. Practising these questions will also help students become familiar with the exam’s level of difficulty and scoring system. Additionally, they learn the various ways that a question from a certain chapter can be phrased.

At Extramarks, subject matter experts develop these questions after carefully studying exam trends, paper patterns, and the most recently released CBSE Sample Papers. Some of the questions that were commonly asked in past year’s papers are also included.

CBSE Class 12 Macroeconomics Chapter-6 Important Questions

Study Important Questions for Class 12 Economics Introductory Macroeconomics Chapter 6 – Open Economy Macroeconomics

In this chapter “Open Economy” of Class 12 Macroeconomics, the topic of international trade in goods and services is covered. Some of the Important Questions Class 12 Macroeconomics Chapter 6 include the open economy, the balance of payments, the current account, the balance of trade, independent transactions, accommodating items, the foreign exchange market, the foreign exchange rate, the fixed exchange rate system, how the foreign exchange rate is determined, devaluation, depreciation, and managed floating.

Students can access Chapter 6 Class 12 Macroeconomics Important Questions from the Extramarks website. It will be easier for students to review the chapter before the exam if they have studied these key questions; in other words, they will just review the chapter’s key points.

Here are some of the Class 12 Macroeconomics Chapter 6 Important Questions. 

Very Short Answer Questions  (1 Mark)

Q1. Define the foreign exchange market.

Ans. The market where different international currencies are traded is known as the foreign exchange market.

Q2. What is a flexible exchange rate?

Ans. In a foreign exchange market, the free market forces of supply and demand determine the flexible exchange rate, sometimes referred to as the free exchange rate.

Short Answer Questions (3 or 4 Marks)

Q1. Why does the demand for foreign currency increase as the price drops?

A decreasing exchange rate results in an increase in the value of a local currency and a decrease in the value of a foreign currency. This shows that domestic demand is rising and that imported goods are becoming less expensive. The need for foreign currency is rising along with local demand for imported goods. As a result, demand and foreign exchange pricing are related.

For example, if the price of a US dollar decreases from Rs. 75 to Rs. 70, it will result in higher imports and higher domestic demand for US items since they will be more affordable. Thus, there will be a greater need for US dollars.

Q2. Differentiate between fixed and flexible exchange rates.

Ans: The following table illustrates the distinctions between fixed and flexible exchange rates:

Basis Fixed Exchange Rate Flexible Exchange Rate
Meaning A fixed exchange rate is one that the national government establishes and maintains. A flexible exchange rate is one that is established by the market.
Authority A fixed exchange rate is managed by an apex bank or other monetary body. A flexible exchange rate is controlled by the dynamics of supply and demand.
Effect on currency With a fixed exchange rate, a currency is both evaluated and devalued. A flexible exchange rate permits the value of a currency to fluctuate.
Hedging Hedging is unnecessary if the country uses a fixed  exchange rate. Hedging is utilised to decrease currency risks in a flexible exchange rate market.

Q3. Why does demand a foreign currency increase when its price falls? Give two instances.

Ans: These two instances are:

  1. Foreign goods become less expensive when compared to local goods because the value of domestic currency increases in exchange while the value of foreign currency decreases. Rising import demand leads to rising need for foreign currency.
  2. Travelling overseas becomes more affordable for domestic tourists as the value of the foreign currency decreases. The need for foreign currency consequently increases.

Long Answer Questions (6 Marks)

Q1. Define foreign exchange and the foreign exchange rate. Give reasons for the connection between the foreign exchange rate and the demand for foreign currency.

Ans. A currency’s conversion into another at a specified rate is referred to as the foreign exchange. The demand and supply factors have an impact on the rate of exchange, which causes currency conversion rates to fluctuate.

The rate or price of one currency in relation to another is known as the foreign exchange rate (also known as the forex rate). It links the currencies of several nations and allows for price and cost comparisons across borders. The purchasing power of a home currency abroad is expressed by the exchange rate.

The two methods for calculating foreign exchange rates are based on the traditional gold standard mechanism and the traditional paper currency system, respectively. The gold standard mechanism is no longer functional since no standard monetary unit is currently convertible into gold. When Indians and commercial organisations want to give gifts to US citizens, buy assets in the US, or pay US citizens for goods and services they have purchased in the US, there is a need for foreign exchange. The demand for foreign currency increases with the volume of imports.

The relationship between the foreign exchange rate and the demand for foreign exchange is as follows:

  1. The demand for foreign currency and the foreign exchange rate are inversely correlated.
  2. The demand curve for foreign currencies always slopes downward, showing an inverse relationship between demand and the exchange rate.
  3. When the exchange rate increases, more domestic currency must be used to purchase one foreign dollar. As a result, import costs go up. As a result, imports decline, which lowers the demand for foreign currency.

Q2. Describe the differences between autonomous and accommodating payment balance transactions. Describe a deficit in the balance of payments in this aspect as well.

Ans: The following are the differences between autonomous and accommodating transactions in the balance of payments:

Basis Autonomous Accommodating
Meaning Autonomous transactions are cross-border economic exchanges that happen for a specific economic purpose, like profit maximisation. Accommodating transactions are ones that are designed to compensate for a shortfall or surplus in autonomous transactions.
Impact on BOP Account The balance of the payment account has no effect on autonomous transactions. Accommodating transactions are made to maintain the amount in the BOP account.
Capital/Current Account Autonomous transactions take place in both capital and current accounts. Accommodating transactions is limited to capital accounts.
Alternative Term These are also referred to as “Above the Line Items.” These are also referred to as “Below the Line Items.”

The deficit in BOP:

  • The BOP deficit occurs when a nation’s payments for autonomous transactions are greater than its revenues. In other words, when receipts for autonomous transactions are less than payments for autonomous transactions, there is a BOP deficit.
  • For example, if the home country receives Rs. 500 crore in revenue while making Rs. 600 crore in payments, the BOP deficit will be calculated as Rs. 600-500= Rs. 100 crore.
  • A nation that is experiencing a balance of payments deficit is one that imports more goods, services, and capital than it exports.
  • To pay for its imports, the nation must borrow money from foreign nations.
  • This boosts the nation’s economy in the short term.

Q1-There are two statements marked as Assertion (A) and Reason (R). Read the statements and choose the correct option:

Assertion (A): The balance of payment is always balanced in the accounting sense.

Reason (R): The balance of payment is an accounting statement that is recorded according to the double-entry bookkeeping system.

opt-

a-Both A and R are true and R is the correct explanation of A.

b-Both A and R are true but R is not the correct explanation of A.

c-A is correct but R is wrong.

ans–Both A and R are true and R is the correct explanation of A.

Q2-Surplus in BOP exists when

Opt-

a-Autonomous receipts > Autonomous payments

b-Autonomous receipts < Autonomous payments

c-Total inflow of foreign exchange > Total outflow of foreign exchange

Ans-Autonomous receipts > Autonomous payments

Q3-Why the demand curve of foreign exchange is downward sloping?

Ans-

The demand curve of foreign exchange is downward sloping because of the inverse relationship between the foreign exchange rate and demand for foreign exchange.

When foreign exchange rate falls, there is a rise in imports as less foreign currency to be paid for given imports. A rise in imports results in an increase in the demand for foreign exchange.

Also, foreign assets become cheaper which results in an increase in investment in foreign countries. It also results in a rise in the demand for foreign exchange. Thus, the demand curve for foreign exchange is downward sloping.

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FAQs (Frequently Asked Questions)

CBSE Class 12 Macroeconomics Chapter 6 focuses on concepts related to open economies. This chapter covers a wide range of important concepts. These include the Balance of Payments (BoP), its surplus and deficit, the foreign exchange market, how the exchange rate is set, etc.

Following these topics are managed to float, managed fixed, and flexible exchange rates as they relate to international experience.

There are also trade deficits, savings and investment, equilibrium production, the national income identity for an open economy, and the determination of income in an open economy.

Open economies are covered in Chapter 6 of Class 12 Macroeconomics. The economy was previously seen as a closed system, where all of its financial transactions were conducted internally with no external interactions. To keep the model straightforward and clarify fundamental macroeconomic principles, the notion of a closed economy was introduced. This chapter is crucial since, in practice, most contemporary economies are open.

An open economy is one that trades some financial assets as well as products and services with other countries. Indians, for example, appreciate and utilise goods made all over the planet. However, some of our items are also exported to other nations. Numerous factors, including international trade, have a significant impact on Indian demand.

After completing the syllabus, students can refer to these Macroeconomics Class 12 Chapter 6 Important Questions. It helps them boost their board exam marks. The solutions provided for each question will give a general overview of the questions posed and the key points to include. These test questions will clarify how marks are allocated for each question and help them concentrate on their exam preparation.